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Misallocation or Risk-Adjusted Capital Allocation?

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  • Joel David

    (USC)

Abstract

Standard, frictionless neoclassical theory of investment predicts that the expected corporate marginal product of capital (MPK) depends on firms' exposure to systematic risk and the price of that risk. This implies that the cross-sectional dispersion in MPK i) depends on cross-sectional variation in risk exposures and ii) fluctuates with the price of risk, and thus is countercyclical. We empirically evaluate these predictions and document strong support for them. In particular, a long-short portfolio of high minus low MPK stocks earns significant and countercyclical excess returns forecastable by standard return predictors. A calibrated investment model suggests that ex ante variation in risk exposure can rationalize permanent dispersion in MPK. These findings suggests that a substantial fraction of dispersion in MPK, often dubbed misallocation, is effectively risk adjusted capital allocation.

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  • Joel David, 2018. "Misallocation or Risk-Adjusted Capital Allocation?," 2018 Meeting Papers 323, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:323
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    Cited by:

    1. Bayer, Christian & Mecikovsky, Ariel & Meier, Matthias, 2018. "Misallocation: Markups and Technology," CEPR Discussion Papers 12727, C.E.P.R. Discussion Papers.
    2. Maurice J.G. Bun & Jasper Winter, 2022. "Capital and labor misallocation in the Netherlands," Journal of Productivity Analysis, Springer, vol. 57(1), pages 93-113, February.
    3. Gondhi, Naveen, 2023. "Rational inattention, misallocation, and the aggregate economy," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 50-75.
    4. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2023. "The Real Response to Uncertainty Shocks: The Risk Premium Channel," Management Science, INFORMS, vol. 69(1), pages 119-140, January.
    5. Li, Kai & Tsou, Chi-Yang & Xu, Chenjie, 2023. "Learning and the capital age premium," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 76-90.
    6. Simone Lenzu & Francesco Manaresi, 2019. "Sources and implications of resource misallocation: new evidence from firm-level marginal products and user costs," Questioni di Economia e Finanza (Occasional Papers) 485, Bank of Italy, Economic Research and International Relations Area.
    7. Maurin, Laurent & Wolski, Marcin, 2021. "Aggregate productivity slowdown in Europe: New evidence from corporate balance sheets," EIB Working Papers 2021/04, European Investment Bank (EIB).

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